#52 - Panera-as-a-Service
The Economics of Panera’s Unlimited Coffee Program
Today we’re going to dig into the economics of Panera’s unlimited coffee subscription, but first I would like to thank you for sharing your inbox with me. The Below the Line newsletter turns one today. I’m very grateful for your subscription and your time. And no hard feelings if you want to unsubscribe.
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Now, it’s time for some coffee. ☕️☕️☕️
There’s no such thing as a free lunch, but what about free coffee?
In February, fast casual cafe Panera Bread launched an unlimited coffee subscription. For $8.99 a month, subscribers get a free cup of coffee or tea every two hours. The company notes that:
The monthly coffee subscription cost of $8.99 plus tax works out to about 30¢ per cup per day for the average 30-day month. This total monthly cost is equivalent to the regular price of about four 12oz cups of Panera coffee—but with the monthly subscription, you can choose any size cup you like!
Thirty cups - any size you like! - for the cost of four. Sounds like a steal for the coffee drinker. So what’s in it for Panera?
Unit Economics
On the surface, the subscription isn’t a big moneymaker. Panera likely loses roughly $3.00 on someone who uses the program daily and breaks-even around 20 cups of coffee per month. The more coffee a subscriber drinks, the more money Panera stands to lose.
Here’s a back of the envelope analysis of the program’s economics:
An Easier Climb
While the unit economics aren’t earth-shattering, the program provides a number of ancillary benefits. For example, it creates a recurring revenue stream for Panera.
Without subscriptions or contracts, growing revenue is a bit like climbing a mountain over and over and over. No matter how high you get, at the start of each month you’re always back down at the bottom with no revenue. As a business grows, the mountain gets higher and the trek gets harder. The beauty of subscription revenue is that it gives you a bit of a head start, making the climb less arduous. Because you don’t start from the bottom, you don’t need to go as far to reach the peak. With 400,000 paying subscribers, Panera starts the month with about $3.6 million in revenue from unlimited coffee subscribers.
Enabling E-commerce
The program also supports Panera’s e-commerce strategy. Subscribers are required to enroll in the company’s rewards program and to store a credit card to their account.
A saved credit card greases the wheels of future purchases. Shopping cart abandonment - putting something in an online shopping cart but not purchasing because the checkout process is too cumbersome or a credit card isn’t handy - is a common e-commerce headache and conversion rate killer. A saved payment method removes one of the biggest causes of shopping cart abandonment.
Chain restaurants like Chipotle, Panera, and Starbucks are driving a larger percentage of sales through e-commerce. Panera’s CEO Niren Chaudhary recently noted that about 60% of the company’s revenue today is from e-commerce, up from approximately 35% before the Covid-19 pandemic. Saved payment information makes it easier for customers to order Napa Almond Chicken Salad sandwiches online.
Come for the Coffee, Stay for the French Onion Soup
The real coup for Panera is that the coffee subscription gets customers to visit its cafes more frequently and to buy more on each visit. This is where the cheap coffee can start getting expensive.
In a recent podcast with Kara Swisher and Scott Galloway (the Panera portion begins around the 29 minute mark), Chaudhary mentions two major benefits of the subscription:
Frequency: The unlimited coffee program is driving visit frequency up. Panera is seeing frequency gains of up to 5x for coffee subscribers. “Up to” statistics aren’t terribly helpful, but Restaurant Business reports a 2x uplift in guest frequency.
Attachment: Coffee subscribers add food to their orders about 40% of the time.
Driving more visits and larger checks is a boon for Panera. This is how the program makes money. While the company likely loses money on customers who drink a lot of coffee and don’t purchase any food, this is more than offset by the roughly 40% of customers that do purchase food. Panera probably loses around $10 on a customer who gets only 50 cups of coffee per month. You don’t need to sell too many bowls of french onion soup to recoup that loss.
This purchase behavior is similar to what Amazon sees from Prime customers. Prime customers spend more than double the amount of non-Prime customers and place orders more frequently. The same principle is at the heart of Costco’s business model.
Unlimited coffee is a good deal for guests and a great deal for Panera.
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It required three re-readings to find the joke in this piece. Turns out, there isn’t a joke on offer. Though it reads like one of those brilliant gotcha fake-outs—from the likes of MAD or The Onion or National Lampoon or the Borat guy having a little fun, it’s actually the work product of some actual people (putative marketers?) with apparently no sense of humor, proportions or history.
We’re all so ensnared in this age of Nothing’s-Too-Stoooopid that this sort of thing not only passes for actual marketing, but will probably end up enshrined in a “case study” at Harvard or Wharton.
Correct me if I’m wrong, but the bottomless cup of coffee is a standard offering in any American diner, Parisian café, any corporate chain sit-down restaurant from your neighborhood IHOP to the recherché reaches of any of the dining rooms at the Sacher Hotel. Works like this: Coffee, please. And then, like magic, every few passes by your table, someone pours another splash of hot coffee into your cup. No app required, no membership, no charts, no graphs, no sciency-math. Just nice hot bottomless coffee. With the possible exception of tap water, coffee is the world’s most ubiquitous “frictionless deliverable.”
The principle is brilliantly illustrated (under “bottomless”) in the Oxford English Dictionary:
“1934 Chicago Tribune 16 Nov. 5/8 (advt.) We've a 10 cent breakfast for you 'til 11:00 in the morning: a gorgeous sugar roll; a bottomless cup of coffee.”
Not that po-mo app-powered AI-infected, Big Data-bedazzled marketing requires a reminder, but The Enlightenment itself was made possible by the very invention of the coffeehouse.
“From their origins in the mid-seventeenth century, the cafes and coffeehouses of Europe created a special social space that contributed to the dissemination of Enlightenment culture,”
( fr. Oxford’s 1,920-page Encyclopedia of the Enlightenment. $685.00)
None of this need be said, of course. The joke starts and ends with “For $8.99 a month, subscribers get a free cup of coffee or tea every two hours…”
Every two hours…?
Uh-huh. Well. That solves the pesky problem of someone bothering you at your table with hot coffee every few minutes, doesn’t it?
☕️ 📈